The Wise Cracks Blog by Dan Otter



Elephant in the Room

My podcast partner, Scott Dauenhauer, CFP, and I attended the recent RISE of California Retirement Investment Summit on Education in Sacramento, California (also attending were fellow 403(b) advocates Barbara Healy, Sandy Keaton, and Steve Schullo). The well-meaning affair was put on by the U.S. Securities and Exchange Commission. The fact that the SEC is paying attention to the public 403(b) plan and its myriad of problems is a very good thing. We need the attention. We appreciate the attention.

A host of smart, well meaning people shared a variety of ideas at the conference for how to solve the intractable 403(b) problem, which is particularly acute in California: teachers are being ripped off by sales agents pitching crap products.

Sandy Blair, the Director of Retirement Readiness for CalSTRS (the California State Teachers Retirement System), shared eye-popping statistics for the California 403(b):

  • Annual fees for 403(b) products range from 0.56% to 4.58%
  • The average cost of all 403(b) products is 1.78%
  • More than 60% of products charge a surrender fee
  • 70% of products include sales commissions

Another speaker mentioned that only 20 percent of California teachers contribute to a 403(b). Yikes!

What to do? Education? Definitely. Hmmm. Anything else? Thinking… Thinking… Thinking.

Sandy Blair also showed a timeline of the 403(b). The plan was created in 1954. It was codified into law in 1958. In 1969 California legislature created a 403(b) program for employees of the Department of Education serviced by a single broker (Smart. We all know that single vendor plans are generally low cost with a focus on plan education over product sales). In 1974, mutual funds were permitted in the 403(b). Whoops. I skipped over something. In 1970 the California insurance industry rammed through legislation banning school districts from putting their 403(b) plans out to competitive bid (no more single vendor). Insurance code 770.3, also known as the “any willing provider” provision, opened the floodgates on high fee, sales agent driven 403(b) products. (read: California Dreaming of a Better 403(b) Plan). 

770.3 is why the overwhelming majority of 403(b) money flows into high fee products. Need evidence? See the bullet points above. Want more evidence? Also shared at the conference was a particularly egregious product, “GoldenPlus”, which imposes a 16-year surrender charge. Yeah, you read that right: 16 years!

What to do? Thinking… Thinking… Thinking.

Speaker after speaker at RISE extolled the importance of investor education. But like a dead body dangling from the rafters that everyone sees but no one acknowledges, there was almost no mention of the simplest of all solutions: repeal 770.3. Many 403(b) problems in California would be solved by this action. School districts would be free to put their 403(b) plans out to bid. They could demand low-cost products and sales-free education. Add auto enrollment with a fiduciary duty to ensure that the Superintendant’s nephew’s products aren’t the vendor of choice, and California teachers would be golden.   

I have an idea for the name of the next conference focusing on the California 403(b): F.A.L.L. to RISE a.k.a. Fix a Lame Law (which will allow California teachers) to RISE.

I recently re-watched the Starsky & Hutch movie starring Ben Stiller and Owen Wilson. Stiller’s Starsky character kept reciting a somewhat annoying catch phrase: Do it! More times than not it worked as a call-to-action tool. My advice to school districts looking to buck 770.3: Do it! My advice on pushing back on the insurance industry hegemony that enriches themselves at the expense of teachers: Do it! My advice to the California Teachers Association on supporting a repeal of 770.3: Do it! My advice to California legislatures on repealing 770.3: Do it!